Fitch: Rising Sovereign Risk from Private Sector Debt in EM
OREANDA-NEWS. Fitch Ratings says in a new report that private sector debt has risen rapidly in key emerging markets (EM) over the past 10 years, surpassing government debt levels and potentially exposing their economies, financial systems and sovereign creditworthiness to downside risks. Such vulnerabilities are heightened by the slowdown in GDP growth, prospective interest rate rises as the Fed prepares for 'lift-off', currency volatility and the fall in commodity prices.
The report uses a new data set for 'wide' non-financial private sector debt, which includes domestic bank credit, debt securities issued in the domestic and international capital markets and other external debt of the corporate sector, and is a broader definition of non-financial private sector debt than the series compiled by the Bank for International Settlements. It captures the debt of both households and non-financial corporates, borrowed from both banks and capital markets and from domestic lenders and non-residents.
The report focuses on seven large 'BBB'-range sovereigns: Brazil (BBB-/Negative), India (BBB-/Stable), Indonesia (BBB-/Stable), Mexico (BBB+/Stable), Russia (BBB-/Negative), South Africa (BBB/Negative) and Turkey (BBB-/Stable). Six are either rated at 'BBB-' or 'BBB' with a Negative Outlook, and are therefore close to the speculative-grade threshold. Focusing on key countries allows greater granularity than EM totals and averages, which are skewed by China.
Wide private sector debt for the seven large EM countries has risen to an average of 71% of GDP at end-2014 from 46% in 2005. Fitch forecasts it to reach 77% by end-2015, exacerbated by the impact of currency depreciation on foreign-currency debt. It is highest in Brazil at 93% of GDP and lowest in Mexico at 47%. Between 2005 and end-2014 Fitch estimates it rose the most in Brazil by 50pp of GDP, followed by Turkey at 49pp. The challenges facing Brazil partly reflect the rapid rise and level of private sector debt, and highlight downside risks to other countries.
Many EM crises have been preceded by a surge in debt. Private sector debt has often migrated to sovereign balance sheets in past financial crises and so represents a contingent liability to the sovereign, particularly for state-owned enterprises, which have been among the heaviest borrowers. A stress situation could feed through to pressure on sovereign creditworthiness through several variables in Fitch's Sovereign Rating Model: weaker and more volatile GDP growth, worsening budget balances and public debt dynamics, pressure on foreign currency reserves, and exchange rate depreciation leading to higher inflation, lower GDP per capita and a higher foreign currency debt burden.
Domestic banks are the primary source of lending behind the boom in non-financial sector private debt (accounting for 71% of the total, on average for the seven countries). Therefore they would face risks of increased non-performing loans, weaker profitability and potentially the need for recapitalisation in the event of a systemic crisis affecting corporates or households.
Fitch estimates 24% of private sector debt (on average for the seven countries) is financed externally, as measured by international debt securities and other external debt, compared with only 3% in China. Rising bank loan-to-deposit ratios, which have climbed to 109% (on average) this year from 87% in 2005 point to an even greater dependence on foreign financing. In Turkey it has soared to 132% from 63% and a strong correlation exists between current account deficits and private sector debt build-up. Foreign financing is less stable and often involves currency risk, amplifying vulnerabilities.
Комментарии